Remember when they said not to worry about the low saving rate?

Three years ago, when the personal saving rate (that is, disposable personal income minus personal outlays, usually expressed as a percentage of disposable personal income) briefly dipped below zero, it was easy to find economists willing to downplay the significance. David Malpass, then of Bear Stearns, was probably the most prominent low-saving-denialist. As he wrote in the WSJ in 2005:

Not only are we not running out of household savings, it is growing fast both in terms of the annual additions and the cumulative buildup of American-owned savings. Household net worth, one good measure of savings, reached $48.5 trillion in 2004. Time deposits and savings accounts alone total a staggering $4.3 trillion, versus slow-growing credit-card debt of $800 billion. True, the U.S. is the world’s biggest debtor, but it is building assets faster than debt.

Despite the decrease in reported levels of personal saving, aggregate household wealth has exhibited a strong uptrend since the end of 2002. Moreover, statistical evidence presented here suggests that past periods of low personal saving rates have not been followed by a retrenchment in spending or slower growth in living standards.

The argument was basically that, because it only looked at income and not asset values or capital gains, the standard measure of the saving rate vastly understated actual saving. Maybe so. But asset prices are volatile, far more volatile than incomes. When asset prices are in a bubble, any asset-based measure of saving is going to overstate actual saving by far more than an income-based measure understates it. As we’re learning now: Stock prices are off 40% in the U.S. House prices are down 20%. The net worth of American households declined in the second quarter, according to the Fed. It’s sure to decline a lot more.

What does this mean? I think it means that the saving rate, as measured the old-fashioned way by the Bureau of Economic Analysis, really does matter. The fact that it dipped so low in recent years should have been a major warning sign to the Fed and others that trouble might be in the offing–that American households might be dangerously exposed to financial-market stress.

The personal saving rate made a big rebound in the second quarter of this year, thanks to those government stimulus checks. It will probably drop back toward zero for a while, because it usually falls during recessions as people struggle to make ends meet. But after that I’d bet on a long rise. At least, I hope that’s what happens.